'Sick man of Europe,' Finland agonizes over austerity

HELSINKI (Reuters) — Finland was one of the toughest European critics of Greece during its debt crisis, chastising it for failing to push through reforms to revive its economy.

Now the Nordic nation is struggling to overhaul its own finances as it seeks to claw its way out of a three-year-old recession that has prompted its finance minister to label the country the new "sick man of Europe."

Efforts by new Prime Minister Juha Sipila to cut holidays and wages have been met with huge strikes and protests, while a big healthcare reform exposed ideological divisions in his coalition government that pushed it to the brink of collapse last week.

There have even been calls from one of Sipila's veteran lawmakers for a parliamentary debate over whether Finland should leave the euro zone to allow it to devalue its own currency to boost exports — a sign of the frustration gripping the country.

In the latest manifestation of the difficulties of cutting spending in euro zone states, Sipila is walking a political tightrope.

He must push through major reforms to boost competitiveness and encourage growth, while placating labor unions to avoid further strikes and costly wage deals next year — and carrying his three-party coalition with him.

Unemployment and public debt are both climbing in a country hit by high labour costs, the decline of flagship company Nokia's phone business and a recession in Russia, one of its biggest export markets.

And with a rapidly aging population, economists say the outlook is bleak for Finland, which has lost its triple-A credit rating and is experiencing its longest economic slump since World War II.

Sipila — who has warned Finland could be the next Greece — is pushing for 10 billion euros ($10.8 billion) of annual savings by 2030, including four billion euros by 2019.

As part of this the government, in power for five months, plans to overhaul healthcare, local government and labor markets to boost employment and export competitiveness.

PROTESTS, STRIKES

But the premier's call for a "common spirit of reform" was met with uproar when he proposed cutting holidays in the public sector and reducing the amount of extra pay given to employees working on Sunday to lower unit labor costs by 5 percent.

About 30,000 protesters rallied in Helsinki in September in the county's biggest demonstration since 1991, and strikes halted railroads, harbors and paper mills. The government soon backtracked, saying it would find savings from other benefits.

The average Finn works fewer hours a week than any other EU citizens, according to the Finnish Business and Policy Forum think-tank. The government estimates Finland has fallen 15 percent behind Germany and Sweden in labor cost competitiveness, resulting in a loss of global export market share.

Disagreements over cost cuts in the healthcare system last week threatened to break up the coalition government, before an agreement was reached.

"The recent course of events makes the outlook even more negative, and supports the arguments for Finnish bond yields to approach French levels going forward," Nordea said in a note.

Sipila may be keen on reform but faces opposition from conservative members of his own Centre Party. The National Coalition party, led by Finance Minister Alexander Stubb, is reformist, but the Finns party leans to the left in fiscal policy and is having tough time agreeing with austerity.

Stubb's frustration was evident when he said in September: "Basically, we are the sick man of Europe."

That tag — a dig at a country's failure to reform its under-performing economy — was widely applied to Germany in around 2000 and more recently to France.

DIMINISHING WORKFORCE

One alternative to austerity - increased spending to stimulate growth — is not on the table as government debt already breaches the EU's 60 per cent limit. It is still low compared with many other states but given Finland's fast-aging population, the government says debt growth must be halted.

Finland is expected to have the highest old age-dependency ratio among all EU countries by 2020, 35.8 persons aged 65 or more per 100 people of working age, according to Eurostat data.

As the unemployment rate climbs towards 10 percent, many Finns yearn for the pre-1990s times when it could devaluate the markka time and again to improve export competitiveness.

Neighboring Sweden benefited from a sharp fall in its crown currency in the wake of the 2008 financial crisis.

Without an independent currency, the government is asking for a "moderate wage deal" as collective agreements expire in many sectors next year.

Before wage talks begin, the government has asked unions to present alternatives to its proposed benefit cuts, such as on the number of public-sector holidays.

"There is a risk that if no collective solution can be found, the labor side will seek compensation (to the cuts) from the wage deals next year," a government source said.

"As we have now squeezed out a very difficult deal on health care, it is fair to expect the labour market parties to be able to agree on difficult issues too."

A majority of Finns still support the euro. The European Commission's Eurobarometer poll last week showed 64 per cent of Finns backed the single currency, though that was down from 69 per cent a year earlier.

But in a sign of mounting frustration, Paavo Vayrynen, a veteran of Sipila's party and a European Parliament member, launched an initiative to demand a referendum over euro membership. With more than 49,000 signatures, the matter is likely to be debated in parliament next year.

"Finland has an expensive workforce and high taxes," said Janne Rantanen, CEO of Merta Logistic Oy, a Finnish food start-up looking to start gourmet fish exports next year. "To export, it would be very useful to get the advantage of devaluation."